HISTORY OF ISLAMIC BANKING

Introduction

Word ‘bank’ comes from the word ‘banco’

- A table or a bench on which Italian money-changers used to display their monies and records and conduct their transactions.

History Of Islamic Banking:• Arabic financial and economic system pre-

Islam– Trading based arrangements were common

• Bay’ al-Musawamah (bargaining)• Bay’ al-muzayadah (auctioning)• Bay’ al-amanah (trust sale)

– Al-murabahah (resale with profit)– Al-tawliyyah (resale at cost)– Al-wadiah (resale at loss or below cost)

Cont.....The first attempt to establish IB was in the 1950’s – in the rural area of Pakistan -Pious landowners deposits their funds without interest rewards-Credit was advanced to other poorer landowners for agricultural improvements-Although there was no shortage of borrowers, for the depositors, it was a once and for all effort-Depositors took considerable interest on how the money was loaned out.

Islamic Banking and Finance Today

Total Assets : USD 400-500 billion Total IFIs : 275 in 75 countries.

Internationalization of Islamic Banking and Finance Numerous countries in this region have began

development of Islamic banking and finance Indonesia: set up first Islamic bank in 1992 Brunei: established Islamic Bank of Brunei

in 1993 Singapore: recently announced that it

envisions to be regional hub for Islamic financial services

Thailand: approved draft bill for the establishment of an Islamic bank in 2001

Development of Islamic Banking and Finance in Other Countries Gulf Cooperation Council (GCC)

States• Bahrain

– Bahrain Monetary Agency (BMA) is the first central bank to develop and issue prudential regulations for Islamic banks

– Bahrain has highest concentration of Islamic financial institutions (28 Islamic banks, 16 takaful operators)

– 2/3 of Islamic financial institutions operating in GCC countries are based in Bahrain

Cont…..• Saudi Arabia

– Shari’ah is the law of the land but it does not have an Islamic banking law

– There is only one banking law, which does not exclude Islamic banking operations.

– Presence of many Western banks providing Islamic banking and financial services• Saudi British Bank, Saudi American Bank,

Saudi Holland Bank, Citigroup, etc.

Cont.....• United Arab Emirates (UAE)

– UAE is a federation of 7 states (emirates) – Region experiencing high growth rates in

Islamic finance (20%)– Islamic financial products constitute 25% of

total banking transactions– Dubai

• Dubai Islamic Bank (DIB) considered to be the first Islamic bank in the world, third largest Islamic commercial bank in the Gulf

• To attract global financial institutions, Dubai International Financial Centre (DIFC) was established and operates as a financial free zone

Cont…..• Kuwait

– Oil-rich Kuwait has huge financial resources (10% of global oil reserves is in Kuwait)

– Oil & gas sector off limits to foreigners but they may invest in the banking sector

– Central Bank of Kuwait (CBK) announced the enactment of law on Islamic banks which, it is hoped, will lead to more banks adopting Islamic banking practices

– Kuwait Finance House (KFH)• One of the largest Islamic banks in the world with

assets of USD10.1 billion

• Qatar– Qatar has the world’s third largest gas reserves– Qatar is among the world’s wealthiest nations per person

(GDP per capita at USD29,800)– Qatar Islamic Bank is the largest Islamic bank in Qatar– It was reported that Qatar and Morocco have been

considering the creation of a bank, through joint efforts, that would operate under Shari’ah

• Oman– Oman has not shown interest in establishing Islamic banks– Although, Bank Muscat, the leading bank in Oman, offers

Islamic financial services

Development of Islamic Banking and Finance in Other Countries.

Cont…..• Philippines

– Muslims comprise 8.5% of the population– The government is considering

developing Islamic banking to serve the country’s minority Muslim population

– Currently there is only one Islamic bank – Al Amanah Islamic Investment Bank of the Philippines

Arguments for Islamic Banking Windows1. Gradual implementation

• It takes time to• Build a customer base• Educate people• Develop human resource capabilities• Acquire adequate infrastructure

2. Efficiency• Lowest cost within the shortest period of time• Leverage on existing infrastructure (people and

physical resources)• Avoid duplication of resources

Cont…..3. Effective development

• Increase the number of players and pool of funds• Variety of products• Market familiarization of products• Effects of competition• Wider marketing base

4. Take advantage of technological advancement of conventional banks

• Standard operating procedures, information systems, control and monitoring systems

Arguments for Full-Fledged Islamic Bank1. Ensure implementation more in line with the

Shari’ah• No commingling of funds• Shari’ah compliance in all aspects

• There has been observations that Islamic banking windows are merely a façade or front, and that back office operations are conducted in conventional banking manner

• Avoid conflict of interest in management objectives and organizational constraints

2. Easier comparison of performance3. Easier regulation and assurance of compliance to

Shari’ah requirements

Cont…..4. Preserve image of Islamic banking5. Attract international (esp. Middle Eastern)

investors• Many have expressed doubts on the Shari’ah

validity of certain Islamic banking products• Full-fledged Islamic banks reflect commitment

Cont…..4. Windows may undermine development of full-

fledged Islamic banks• Performance of Islamic banking windows vis-à-

vis full-fledged Islamic banks5. Employees and management more focused

• Development of relevant and necessary competencies and knowledge